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Why do so many family businesses fail?

On Behalf of | Nov 30, 2022 | Business Law |

Small businesses are the backbone of the American economy, but about 77% of small businesses also have family members involved. These facts mean that three of every four small businesses are family businesses. While many businesses do not make it past the first few years, family businesses have the additional hurdle of not making it to third-generation ownership and management.

3 Common causes for closing up shop

These may not come as a surprise, but it is still important to explain why it happens:

  1. Family conflicts: The familial bond is strong but can be positive or negative. Two siblings may have baggage that goes back to childhood and causes dysfunction. Blood also does not unify a business vision, so sisters may have different business goals or management styles that clash. Non-family business partners generally come together because they share a vision or have complementary skill sets. If things do not work out, they can dissolve the partnership and move on, but this can be hard to do if an ex-partner is at every family gathering.
  2. Lack of skills: Business owners often groom their children to take over a business. Some flourish, some do okay, and some do not have what it takes. Genetics does not guarantee business acumen or interest. It may also be a matter that a previous generation had success, but the concept got stale over time, and the next generation could not adapt to customers’ changing needs.
  3. Not picking the right people: Traditionally-minded owners may groom the oldest child to take over, but the oldest may not be the best person for the job. It also may be a matter where owners should leave the management or other significant leadership roles to others outside the family who are more qualified to do the work. It can be particularly true if ownership is unexpectedly thrust upon those not ready or able to take the mantle. If left to sink or swim, it may be a matter of where they sink.

Solutions come in different forms

Business circumstances are as unique as the individuals and families involved. Whether taking control of the business, getting it back on track, or planning an exit strategy, it is advisable to consult with business law attorneys. They can help co-owners find workable solutions to conflicts, identify red flags that need attention and generally act as an impartial third party committed to getting results for ownership. The viability of the business may depend upon it.

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